Using the Three Co's to Jointly Model Commodity Markets: Co-Production, Co-Consumption and Co-Trading

Abstract

In this study, we develop a framework, based on the Global Vector Autoregression Model (GVAR), to unite two differing perspectives on commodity markets, the single-market centered approach, investigating the micro- and macroeconomic drivers of commodity prices, as well as the inter-market perspective, which observes joint movements of commodity prices, beyond macroeconomic variables, on exchanges. The strong co-movement between industrial metal prices is represented exceptionally well by our framework, which connects the markets using co-consumption, co-production and co-trading data. While the microeconomic supply and demand attributes have no significant impact on individual market level, indicating a contradiction to the single-market centered approach, the cross-commodity dimension reveals these attributes are determining, even on price variables.